Now, many of us have little to do with this picture-perfect rational
saver: We don’t know how to figure out how much money is enough; we’ve
had so many temp jobs before landing the steady gig that it was
impossible to plan (or so we tell ourselves); we have an instinctive
aversion to payroll withdrawals; and we forever postponed filling out
the paperwork to enrol in our company’s pension plan.

That’s why the Harper government’s new pooled registered pension plans are set to include an auto-enrollment feature. We’re talking about bill C-25,
which lays out the federal government’s vision of PRPPs and–unlike
anything to do with Old Age Security–is the pension reform measure
that’s actually before parliament right now. PRPPs are
voluntary pension schemes aimed at the 34 per cent of Canadians–mostly
self-employed and small business employees–who have no workplace
pension. Under the government’s proposal, contributions would be pooled
(allowing for lower administrative costs) and managed by private
financial institutions. [More: Maybe it's the health-care house that's burning and not the pension house]

While employer participation in a PRPP is voluntary, the employees of
a company that opts in are automatically enrolled. They may choose to
opt out of the plan, but no one will ask permission to sign them up.
That little trick, Ottawa believes, will be enough to boost the number
of Canadians with a retirement savings account. There’s plenty of
evidence to support this view. In the U.S., after Congress modified the
rules around 401ks to favour automatic registration, the number of
Americans saving through that type of retirement account grew
dramatically, reaching almost 90 per cent in some companies. New Zealand
and Australia have played around with auto-enrollment as well, with
similarly staggering results. And the U.K. is currently in the process of rolling out similar automated schemes.

All of these pension reforms–and Ottawa’s own bill, the Department of
Finance confirmed–are based on research from the increasingly popular
field of behavioural economics, which recognizes that many people in
many circumstance don’t act like rational actors. Behaviourists have
been drawing up economic models that seek to incorporate factors that
may muddle our rationality, such as instincts, myopia, inertia and
laziness, and they’ve helped design a number of public policies that
play off of those irrational tendencies to nudge us towards certain
desired behaviors. Automatic enrollment for retirement accounts is just
one example. The Obama administration, for instance, used behavioural
economics to package its 2009 Making Work Pay
tax credit in a way that was supposed to make Americans spend, rather
than save, the extra money (judgment is still out on whether this one
worked).

Needless to say, libertarians call policies like pension plans with
auto-enrollment paternalistic. On the other hand, one could easily argue
that if we can’t behave like rational adults, maybe we do need a nanny
state. Policymaking has always consisted of dreaming up schemes to
channel collective behaviour toward certain desired outcomes. And, in Canada, the government already uses payroll taxes to pay for OAS and the Canada Pension Plan.
And in Canada, the government already uses automatic deductions to fund
the Canada Pension Plan and OAS payments are funded from general
revenues. [More: Harper and pensions: The choice you make]

Yet, when it comes to making people save for retirement, there may be
a happy medium between paternalists and libertarians: simplifying the
way people enrol in a pension scheme. Studies where individuals were
served with a simple enrollment form with a few predetermined options
for contribution rates and asset allocation showed increases in
participation of up to 20 percentage points , says James Choi,
an associate professor of finance at Yale University. Admittedly,
that’s not quite as much as with auto-enrollment, which can boost
registrations by up to 50 percentage points. But simplified enrolment,
says Choi, allows people to choose the savings option that best serves
their needs and preferences, whereas participants in auto-enrollment
systems tend cluster around one default option that can’t possibly
serve, say, a young household as well as it does a couple close to
retirement. Boris Palameta, senior research associate at the Social Research and Demonstration Corporation adds that
automatic enrollment has also been associated with low savings rates:
“If the path of least resistance is to stay in a plan at a certain,
pre-set, default contribution rate, people will usually do that, and it
may not be to their advantage, especially is the default rate is pretty
low, which it usually is.”

Moreover, automatic enrollment may not be the best approach in the
case of companies with a high employee turnover, notes Choi. In
Australia, for example, the Superannuation Guarantee system requires
employers to withhold nine per cent of employee earnings to be channeled
towards retirement savings, but 20 per cent of individual accounts,
each holding an average of $2,000, have become abandoned property
because people switched jobs without leaving so much as an email address
behind. [More: Retirement 649]

Even in the U.S. there are signs that the impact of auto-enrollment
on participation rates may be leveling off somewhat, possibly because
workers eventually opt out and employers that match employee
contributions become concerned about the costs of high enrollment, says
Palameta. “The States are a pioneer in this, and I guess they realized
some of the shortcomings too,” he notes, adding that “they might have to
do some tinkering with the automated nature of the system.”

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